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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-17712
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Pegasus Aircraft Partners, L.P.
(Exact name of registrant as specified in its charter)
Delaware 84-1099968
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(State of organization) (IRS Employer
Identification No.)
Four Embarcadero Center 35rd Floor
San Francisco, California 94111
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (415) 434-3900
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
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Pegasus Aircraft Partners, L.P.
Quarterly Report on Form 10-Q for the
Quarter Ended March 31, 1996
Table of Contents
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<TABLE>
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Page
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Part I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) 2
Balance Sheets - March 31, 1996
and December 31, 1995 2
Statements of Income for the three months
ended March 31, 1996 and 1995 3
Statements of Partners' Equity for the three
months ended March 31, 1996 and 1995 4
Statements of Cash Flows for the three
months ended March 31, 1996 and 1995 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 13
Part II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 19
</TABLE>
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
PEGASUS AIRCRAFT PARTNERS, L.P.
BALANCE SHEETS -- MARCH 31, 1996 AND DECEMBER 31, 1995
(unaudited)
ASSETS
<TABLE>
<CAPTION>
1996 1995
---- ----
(in thousands except unit data)
<S> <C> <C>
Cash and cash equivalents $ 3,786 $ 4,081
Restricted cash 1,191 1,135
Rent and other receivables 1,135 1,534
Aircraft, net (Notes 2, 6 and 7) 28,894 29,814
Prepaid expenses 34 47
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Total Assets $ 35,040 $ 36,611
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LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Notes payable (Note 4) $ 1,527 $ 1,625
Accounts payable and accrued expenses 113 98
Payable to affiliates (Note 3) 533 628
Deferred rental income 137 218
Distributions payable to partners 1,624 1,616
Maintenance reserve payable 1,303 1,235
Maintenance expense payable (Note 7) 150 --
Accrued interest payable 13 15
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Total Liabilities 5,400 5,435
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COMMITMENTS AND CONTINGENCIES (Notes 4, 5 and 6)
PARTNERS' EQUITY:
General Partners (500) (485)
Limited Partners (4,000,005 units outstanding) 30,140 31,661
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Total Partners' Equity 29,640 31,176
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Total Liabilities and Partners' Equity $ 35,040 $ 36,611
======== ========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
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PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(unaudited)
<TABLE>
<CAPTION>
1996 1995
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(in thousands, except unit data
and per unit amounts)
<S> <C> <C>
REVENUE:
Rentals from operating leases $ 1,451 $ 1,688
Interest 75 65
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1,526 1,753
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EXPENSES:
Depreciation and amortization 920 1,289
Management and re-lease fees (Note 3) 98 126
General and administrative (Note 3) 57 55
Interest expense 43 53
Direct lease 41 26
Maintenance expense (Note 7) 287 --
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1,446 1,549
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NET INCOME $ 80 $ 204
========== ==========
NET INCOME ALLOCATED:
To the General Partners $ 1 $ 2
To the Limited Partners 79 202
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$ 80 $ 204
========== ==========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ .02 $ .05
========== ==========
WEIGHTED AVERAGE NUMBER
OF LIMITED PARTNERSHIP
UNITS OUTSTANDING 4,000,005 4,000,005
========== ==========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
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PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF PARTNERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(unaudited)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
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(in thousands)
<S> <C> <C> <C>
Balance, January 1, 1996 $(485) $ 31,661 $ 31,176
Net income 1 79 80
Distributions declared to partners (16) (1,600) (1,616)
----- -------- --------
Balance, March 31, 1996 $(500) $ 30,140 $ 29,640
===== ======== ========
Balance, January 1, 1995 $(420) $ 38,190 $ 37,770
Net income 2 202 204
Distributions declared to partners (10) (1,000) (1,010)
----- -------- --------
Balance, March 31, 1995 $(428) $ 37,392 $ 36,964
===== ======== ========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
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PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(unaudited)
<TABLE>
<CAPTION>
1996 1995
---- ----
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 80 $ 204
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 920 1,289
Change in assets and liabilities:
Rent and other receivables 327 (472)
Other assets 13 12
Accounts payable and accrued expenses 15 23
Payable to affiliates (95) (33)
Deferred rental income (81) --
Unrestricted maintenance reserves 12 --
Accrued interest payable (2) --
Maintenance expense payable 150 --
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Net cash provided by operating activities 1,339 1,023
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized aircraft improvements -- (31)
Repayment of advances by lessees 72 73
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Net cash provided by investing activities 72 42
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CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions paid to partners (1,608) (1,818)
Transfers to restricted cash -- (35)
Repayment of notes payable (98) (91)
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Net cash used for financing activities (1,706) (1,944)
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NET DECREASE IN CASH AND
CASH EQUIVALENTS (295) (879)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 4,081 1,763
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CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 3,786 $ 884
======= =======
SUPPLEMENTAL SCHEDULE OF
CASH FLOW INFORMATION:
Interest paid $ 45 $ 51
</TABLE>
The accompanying notes are an integral part
of these financial statements.
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PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
--------------
(unaudited)
1. GENERAL
The accompanying unaudited interim financial statements include all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of the General Partners, necessary to fairly present the financial
position of the Partnership as of March 31, 1996 and the results of its
operations, changes in partners' equity, and cash flows for the three months
then ended.
These financial statements should be read in conjunction with the
Significant Accounting Policies and other Notes to Financial Statements included
in the Partnership's annual audited financial statements for the year ended
December 31, 1995.
2. AIRCRAFT UNDER OPERATING LEASES
The Partnership's net investment in aircraft as of March 31, 1996 and
December 31, 1995 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
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<S> <C> <C>
Aircraft on operating leases $ 56,095 $ 56,095
Less: Accumulated depreciation (27,915) (26,995)
Reserve for decline in market
value of aircraft (5,169) (5,169)
Provision for maintenance cost (178) (178)
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$ 22,833 $ 23,753
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Aircraft held for lease(A) $ 18,351 $ 18,351
Less: Accumulated depreciation (8,617) (8,617)
Net Lease Settlement proceeds
accounted for as cost recovery (3,673) (3,673)
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6,061 6,061
-------- --------
$ 28,894 $ 29,814
======== ========
</TABLE>
(A) Represents 747 aircraft. The Partnership entered into an agreement in
principle to lease the aircraft to TWA for a term of approximately 48 months at
a rental rate of $180,000 per month.
3. TRANSACTIONS WITH AFFILIATES
Management Fees The General Partners are entitled to receive a
quarterly subordinated base management fee in an amount generally equal to 1.5%
of gross aircraft rentals, net of re-lease fees paid. Of this amount, 1.0% is
payable to the Managing General Partner and 0.5% is
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payable to the Administrative General Partner. The General Partners earned
$21,000 of base management fees during the three months ended March 31, 1996.
The General Partners also are entitled to receive a quarterly
subordinated incentive management fee in an amount equal to 4.5% of quarterly
cash flow and sales proceeds (net of resale fees). Of this amount, 2.5% is
payable to the Managing General Partner and 2.0% is payable to the
Administrative General Partner. The General Partners earned $46,000 of incentive
management fees during the three months ended March 31, 1996.
Re-lease Fee The General Partners are entitled to receive a quarterly
subordinated fee for re-leasing aircraft or renewing a lease in an amount equal
to 3.5% of the gross rentals from such re-lease or renewal for each quarter for
which such payment is made. Of this amount, 2.5% is payable to the Managing
General Partner and 1.0% is payable to the Administrative General Partner. The
General Partners earned $31,000 of re-lease fees during the three months ended
March 31, 1996. All of the above fees are subordinated to the limited partners
receiving an 8% annual non-cumulative return based upon original contributed
capital.
Accountable General and Administrative Expenses The General Partners
are entitled to reimbursement of certain expenses paid on behalf of the
Partnership which are incurred in connection with the administration and
management of the Partnership. Such reimbursable expenses amounted to $13,000
during the three months ended March 31, 1996, all of which were payable to the
Administrative General Partner.
During the quarter ended March 31, 1996 and the year ended December 31,
1995, the Administrative General Partner deferred the receipt of management fees
and re-lease fees earned beginning January 1, 1995. Such fees aggregated $36,000
and $273,000 for the quarter ended March 31, 1996 and the year ended December
31, 1995, respectively.
4. NOTES PAYABLE
During April 1994, the Partnership established a loan facility with an
unaffiliated, third-party lender ("Lender"), which was collateralized by the
Partnership's one-half interest in the McDonnell Douglas MD-81 aircraft leased
to USAir, Inc. ("USAir") and the Partnership's Boeing 747-100 aircraft leased to
Continental. Under the terms of the loan agreement, the Partnership was entitled
to borrow up to $4,000,000, the commitment for which expired on May 1, 1995. The
loan agreement required a commitment fee on the unborrowed funds of .5% per
annum payable quarterly. There are no compensating balance requirements. The
Partnership had an option for a fixed (market interest rate on the U.S. Treasury
bond with a similar maturity plus 2.75%) or floating (the Lender's prime rate
plus 1.5%) rate of interest.
In July 1995, the Partnership and the Lender completed an extension of
the commitment. Under the new agreement, the aggregate commitment will remain at
$4,000,000, the Partnership's ability to borrow under the facility was extended
until May 1, 1997 and the floating interest rate charged under the facility was
reduced to the Lender's prime rate plus .5%. The Lender released the Boeing
747-100 aircraft as collateral under the loan and received as substitute
collateral a perfected security interest in the Partnership's MD-82 aircraft
leased to TWA. Through March 31, 1996, the Partnership had borrowed an aggregate
of $2,150,000 pursuant to the loan
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agreement, of which $1,527,000 and $1,625,000 were outstanding at March 31, 1996
and December 31, 1995, respectively.
5. LITIGATION
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber Group, Inc. (together, "PaineWebber"), among others, by
allegedly dissatisfied partnership investors. In March 1995, after the actions
were consolidated under the title In re: PaineWebber Limited Partnerships
Litigation, the plaintiffs amended their complaint to assert claims against a
variety of other defendants, including Air Transport Leasing, Inc., an affiliate
of PaineWebber and the Administrative General Partner in the Partnership
("Administrative General Partner").
The amended complaint in the New York Limited Partnership Actions
alleged, among other things, that, in connection with the sale of interests in
the Partnership, PaineWebber and the Administrative General Partner (1) failed
to provide adequate disclosure of the risks involved with each partnership; (2)
made false and misleading representations about the safety of the investments
and the partnership's anticipated performance; and (3) marketed the partnership
to investors for whom such investments were not suitable. The plaintiffs also
alleged that following the sale of the partnership investments PaineWebber and
the Administrative General Partner misrepresented financial information about
the partnership's value and performance. The amended complaint alleged that
PaineWebber and the Administrative General Partner violated the Racketeer
Influenced and Corrupt Organizations Act ("RICO") and the federal securities
laws. The plaintiffs sought unspecified damages, including reimbursement for all
sums invested by them in the partnerships, as well as disgorgement of all fees
and other income derived by PaineWebber from the limited partnerships. In
addition, the plaintiffs also sought treble damages under RICO.
On May 30, 1995, the US District Court certified class action treatment
of the plaintiffs' claims in the New York Limited Partnership Actions.
In January 1996, PaineWebber signed a memorandum of understanding with
the plaintiffs in the class action outlining the terms under which the parties
have agreed to settle the case. Pursuant to that memorandum of understanding,
PaineWebber irrevocably deposited $125 million into an escrow fund under the
supervision of the United States District Court for the Southern District of New
York to be used to resolve the litigation in accordance with a definitive
settlement agreement and plan of allocation which the parties expect to submit
to the court for its consideration and approval within the next several months.
Until a definitive settlement and plan of allocation is approved by the court,
there can be no assurance what, if any, payment or non-monetary benefits will be
made available to class members who are unitholders in the Partnership.
In April 1995, two investors in the Pegasus limited partnerships filed
a purported class action in the Circuit Court of the State of Illinois for Cook
County entitled Robert M. Jacobson, et al. v. PaineWebber, Inc., et al., making
allegations substantially similar to those in the New York Limited Partnership
Actions, but limited in subject matter to the sale of the Pegasus partnerships,
and without a RICO claim. The plaintiffs in the Jacobson case simultaneously
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remained as participants in the New York Limited Partnership Actions, and
subsequently sought to intervene in that action and to be named class
representatives for a separate subclass that they asked the Court to establish
consisting of investors in the Pegasus partnerships. The court in the New York
Limited Partnership Actions has not yet ruled on their request.
Three actions were filed in the District Court for Brazoria County,
Texas, relating to the sale and sponsorship of interests in the Partnership and
an affiliated partnership. The complaints make state law claims, specifically,
common law fraud, conspiracy, violations of section 27.01 of the Texas Business
and Commerce Code, fraud in the inducement, negligent misrepresentation,
negligence, breach of fiduciary duty, violations of the Texas Securities Act,
and violations of the Texas Deceptive Trade Practices Act. The plaintiffs seek
unspecified damages, including attorneys' fees, reimbursement for all sums
invested by them in the partnerships, exemplary damages, and treble damages
under the Texas Deceptive Trade Practices Act. All three actions have been
removed to federal court and two have been transferred to the United States
District Court for the Southern District of New York. The third action has been
dismissed with the consent of the parties on the grounds that it is duplicative
of the two actions now before the federal court in New York.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiff's purchases of various limited partnership interests. The complaint
alleges, among other things, that PaineWebber and its related entities committed
fraud and misrepresentation and breached fiduciary duties allegedly owed to the
plaintiffs by selling or promoting limited partnership investments that were
unsuitable for the plaintiffs and by overstating the benefits, understating the
risks and failing to state material facts concerning the investments. The
complaint seeks compensatory damages of $15 million plus punitive damages.
Under certain limited circumstances, pursuant to the Partnership
Agreement and other contractual obligations, PaineWebber and its affiliates,
including the Administrative General Partner could be entitled to
indemnification from the Partnership for expenses and liabilities in connection
with this litigation. The General Partners are unable to determine the effect,
if any, of such action on the Partnership's financial statements, taken as a
whole.
6. AIRCRAFT
Continental Airlines Leases During December 1988, the Partnership
acquired a Boeing 727-200 advanced aircraft for a total purchase price of
$8,025,000. The aircraft was originally subject to an operating lease with
Continental Airlines, Inc. ("Continental"), the term of which ends on October
31, 1996. Rental payments are payable monthly, in advance at the rate of
$81,000.
During December 1988, the Partnership acquired a Boeing 747-100
aircraft for a total purchase price of $17,847,000. The aircraft was originally
subject to an operating lease with Continental, the term of which was
originally scheduled to expire on April 30, 1996 with rental payable
monthly, in advance, at the rate of $269,000.
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In January 1995, Continental announced that it was grounding its Airbus
Industrie manufactured aircraft and taking certain Boeing 747 aircraft out of
service, including the Boeing 747 Aircraft owned by the Partnership. Continental
discontinued utilizing the Aircraft, did not make any rental payments after
January 1995 and returned the Aircraft to the Partnership. During the quarter
ended September 30, 1995 the Partnership and Continental completed the
negotiation of a lease settlement agreement ("Lease Settlement"). Under the
terms of the Lease Settlement, Continental agreed to pay the Partnership the
amount otherwise due under the Lease as rent for the period February 1995 to
August 1995 plus a discounted amount representing the amount of rent that would
have been due under the Lease for the period September 1, 1995 to April 30,
1996, the scheduled expiration date of the Lease. Continental returned the
Aircraft and engines in the return condition required by the Lease. On October
16, 1995 the Partnership received the Lease Settlement proceeds totaling
$3,906,491.
A substantial portion of the proceeds were accounted for under the cost
recovery method reducing the Partnership's net carrying value of the aircraft.
The remaining gain on the lease settlement was offset by the related management
fees accrued and thus no net gain or loss was recognized on the settlement. At
March 31, 1996, the Partnership had a carrying value of $6,061,000 in the
747-100 aircraft which approximated its estimated market value at such date.
Continental filed for Chapter 11 bankruptcy protection on December 3,
1990 and stopped making lease payments. The Partnership entered into various
lease modifications and financing arrangements with Continental as a result of
the bankruptcy. At March 31, 1996, the Partnership had deferred rentals
receivable from Continental of $38,000, all of which was repaid in April 1996.
Additionally at March 31, 1996, the Partnership had advances to Continental
aggregating $161,000 with respect to aircraft modifications, which were being
repaid monthly with interest.
Provisions for decline in market value of $400,000 and $57,000 were
established during the years ended December 31, 1995 and 1994, respectively, to
reflect an estimate of the recoverability of the Partnership's investment in
the Boeing 727-200 aircraft.
Trans World Airlines Lease During February 1989, the Partnership
acquired a McDonnell Douglas MD-82 aircraft for a total purchase price of
$21,017,000. The aircraft is subject to an operating lease with Trans World
Airlines, Inc. ("TWA"). The lease which was originally scheduled to expire on
April 23, 1993 was modified and under the terms of the lease amendment was
extended until October 1, 1998 with rentals payable monthly, in advance, at the
rate of $185,000 per month.
Pursuant to the lease amendment, the Partnership reimbursed TWA for
$225,000 of capital improvements and advanced $750,000 to TWA to finance certain
major maintenance procedures. TWA is repaying the $750,000 to the Partnership
over the remaining lease term, in equal monthly installments, with interest at a
fixed rate of 9.68%. At March 31, 1996, the balance of the receivable was
$393,000 ($428,000 at December 31, 1995). All first quarter 1996 payments have
been made by TWA.
In mid-October 1994 because of operating and financial problems, TWA
announced that it would seek a global restructuring of its capital by offering
common stock for its debt securities preferred stock obligation and lease
deferrals negotiated with aircraft lessors such as the Partnership ("Exchange
Offer"). TWA and the Partnership agreed to a deferral of 50% of the
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original rent scheduled for November 1994 and 75% of the original schedule from
December 1994 to April 1995 with originally scheduled payments resuming in May
1995. Additionally, TWA and the Partnership reached an agreement to extend the
lease of the MD-82 aircraft by six years beyond the then scheduled expiration
date to October 1, 2004 at the current lease rate at $185,000 per month. All
rents deferred during the November 1994 to April 1995 period are being repaid
with interest at 12% from the date of the deferral over an 18 month period
which commenced May 1, 1995. On June 30, 1995, TWA filed its prepackaged
reorganization plan under Chapter 11 of the U.S. Bankruptcy Code. On August 23,
1995, the reorganization plan, which included the foregoing lease
modifications, was confirmed by the Bankruptcy Court, and TWA emerged from
bankruptcy. TWA has made all rental payments, advance repayments and payments
of deferred rent when due. However, there can be no assurance that TWA will be
able to meet its obligations in the future. At March 31, 1996 and December 31,
1995, the Partnership had $323,000 and $465,000, respectively, of deferred rent
receivables relating to the TWA aircraft which were included in rents and other
receivables on the balance sheets.
Kiwi International Air Lines Leases The Partnership owns two Boeing
727-200 non-advanced aircraft, originally acquired in December 1988 for
$6,308,000 per aircraft. The aircraft were originally leased to Northwest
Aircraft, Inc. ("Northwest") subject to operating leases, one of which expired
in August 1993 and the other of which expired in April 1994, both after short
extensions. Upon the expiration of the leases, Northwest paid the Partnership
$433,000 and $325,000 representing economic settlements in lieu of completing
certain maintenance procedures required for the respective leases. In February
1994 and April 1994, the Partnership entered into the leases with Kiwi, each
for terms of approximately five years with rents payable monthly in advance at
$55,000 per aircraft. The leases also require Kiwi to pay maintenance reserves,
which can be drawn down by Kiwi for specific maintenance procedures, of $250
per flight hour. The aircraft were delivered in April and July 1994. In
connection with the first Kiwi lease, the Partnership also acquired an
additional aircraft engine, at a cost of $195,000, which is used as a spare by
Kiwi on a utilization basis at $105 per flight hour of use.
In connection with the Kiwi leases, the Partnership completed certain
maintenance procedures, aircraft-aging related modifications, the purchase of
the spare engine for Kiwi's fleet discussed above and other lessee-required
modifications prior to delivery of the aircraft to Kiwi at an aggregate cost of
$3,303,000 of which $580,000 represented maintenance-related work funded by the
maintenance-related payments received from Northwest and the balance of which
was capitalized as part of the Partnership's basis in the aircraft. (including
the spare engine)
During the terms of the leases Kiwi can request that the aircraft be
hushkitted to obtain Stage 3 noise abatement for which the lease term will be
reset to five years with lease payments increasing to amortize the cost of
hushkitting at the rate of 2% per month. Alternatively, the Partnership can deem
the hushkitting economically unfeasible at which point Kiwi can terminate the
lease and return the aircraft. Based upon the composition of its fleet and the
FAA mandated deadlines for compliance with Stage 3 Noise Regulation, the General
Partners believe that Kiwi may request that the Partnership hushkit one or both
of the 727 aircraft by December 1996. Such upgrade is estimated to cost $1.9
million per aircraft and the Partnership would need to acquire additional
financing to complete such work.
During 1995, Kiwi encountered continued liquidity and operating
problems. The Partnership and Kiwi agreed to a deferral of February 1995 and
half of March 1995 rent
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($165,000 in the aggregate) plus an accommodation to permit Kiwi to not fund the
maintenance reserves in February, March and April 1995. The deferred rent was
repaid with interest at 12% over a 9-month period which began July 1, 1995. At
March 31, 1996, the Partnership held maintenance deposits aggregating $1,191,000
with respect to the Kiwi aircraft. Kiwi made its February 1996 lease and
maintenance payments late and has requested a similiar extension of time to make
its May payments.
Provisions for decline in market value of $1,943,000 and $2,335,000
were established during the years ended December 31, 1994 and 1992,
respectively, to reflect an estimate of the recoverability of the Partnership's
investment in these aircraft.
7. AIRCRAFT REMARKET
In April 1996, the Partnership entered into an agreement in principle
with TWA for the lease of the 747 aircraft for a term of approximately 48
months at a lease rate of $180,000 per month. Consummation of the transaction
is subject to completion of lease documentation and comletion of certain
maintenance work. The Partnership commenced a scheduled maintenance check on
the aircraft to prepare the aircraft for delivery. The Partnership estimates
total costs (including capital expenditures) associated with the check,
including certain integration costs, to be approximately $1,300,000. At March
31, 1996 the Partnership recognized a maintenance charge of $287,000 to reflect
the work completed at such date.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
The Partnership owns and manages a diversified portfolio of leased
commercial aircraft and makes quarterly distributions to the partners of net
cash flow generated by operations. In certain situations, the Partnership may
retain cash flow from operations to finance authorized capital expenditures.
At March 31, 1996, the Partnership's unrestricted cash and cash
equivalents exceeded declared but unpaid distributions to partners by
$2,162,000. At December 31, 1995, the Partnership's unrestricted cash and cash
equivalents exceeded declared, but unpaid, distributions to the partners by
$2,456,000. The principal reason for the decrease in cash was that distribution
to partners exceeded cash from operations adjusted for collections of advances
and debt service during the quarter ended March 31, 1996.
Rent and other receivables decreased by $399,000 from $1,534,000 at
December 31, 1995 to $1,135,000 at March 31, 1996. This decrease is primarily
the result of the continued repayments of advances and deferrals by Continental,
TWA and Kiwi.
Prepaid expenses decreased by $13,000 from $47,000 at December 31, 1995
to $34,000 at March 31, 1996.
Deferred rental income decreased $81,000 from $218,000 at December 31,
1995 to $137,000 at March 31, 1996 due to the recognition of income during the
1996 Quarter of an amount received in December 1995.
Payable to affiliates decreased by $95,000, from $628,000 at December
31, 1995 to $533,000 at March 31, 1996. The decrease was attributable to the
payment, during the period, to the Managing Geeral Partner of fees associated
with the 747 Lease Settlement which were accrued at December 31, 1995 partially
offset by the continued deferral of management fees otherwise due the
Administrative General Partner.
During the three months ended March 31, 1996 the Partnership paid cash
distributions pertaining to the fourth quarter (except the amount due to the
Administrative General Partner which remains unpaid). The quarterly distribution
represented an annualized rate equal to 8% of contributed capital ($.40 per
Unit).
The amount of each distribution will be determined on a quarterly basis after an
evaluation of the Partnership's operating results and its current and expected
financial position. The distribution for the first quarter of 1996 was paid on
April 25, 1996 at an annualized rate of 8% of contributed capital ($.40 per
Unit).
Distributions may be characterized for tax, accounting and economic
purposes as a return of capital, a return on capital, or both. The portion of
each cash distribution by a partnership which exceeds its net income for the
fiscal period may be deemed a return of capital. Based on the amount of net
income reported by the Partnership for accounting purposes, approximately 95%,
of the cash distributions declared for the quarter ended March 31, 1996,
constituted a return
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of capital. Also, based on the amount of net income reported by the Partnership
for accounting purposes, approximately 69% of the cash distributions paid to the
partners from inception of the Partnership through March 31, 1996 constituted a
return of capital. However, the total actual return on capital over the
Partnership's life can only be determined at the termination of the Partnership
after all cash flows, including proceeds from the sale of the aircraft, have
been realized.
In April 1994, the Partnership established a loan facility with a third
party lender which expired in May 1995. In July 1995, the Partnership and the
Lender completed an extension of the commitment. Under the new agreement, the
aggregate commitment remained at $4,000,000, the Partnership's ability to
borrow under the facility was extended until May 1, 1997 and the floating
interest rate charged under the facility was reduced to the Lender's prime rate
plus .5%. The Lender released the Boeing 747-100 aircraft as collateral under
the loan and received a perfected security interest in the Partnership's MD-82
aircraft leased to TWA. Through December 31, 1995, the Partnership had borrowed
an aggregate of $2,150,000 pursuant to the loan agreement, of which $1,527,000
and $1,625,000 was outstanding at March 31, 1996 and December 31, 1995,
respectively. In connection with the extension of the loan commitment the
Lender released its interest in a cash collateral account established to secure
the Partnership's obligation under the letter of credit agreement relating to
the TBT lease.
The Partnership may require additional financing to fund future
maintenance work on aircraft, hushkitting the aircraft, or other capital
improvements such as cargo conversion. For example, because of FAA mandated
compliance with Stage 3 aircraft noise regulation, Kiwi may request the
Partnership to hushkit one or both of the 727 aircraft leased to Kiwi. If the
Partnership were to elect to hushkit these aircraft, the Partnership would need
to utilize its current loan facility or complete a new financing. The
Partnership can borrow up to 35% of the original offering proceeds. Any such
borrowings will only be made if the General Partners believe such borrowings
will be in the best interests of the Partnership and will enhance portfolio
value. The Partnership cannot utilize borrowings to purchase aircraft. However,
there can be no assurance that the Partnership would be able to obtain any
additional borrowings, if required.
During 1995, TWA completed its financial restructuring and made all
payments due. Additionally, during 1995, Kiwi continued to make rental and
maintenance payments subject to the leases as amended, although it continues to
have liquidity and capital concerns. Kiwi requested an extension of time to make
related rental, deferred rent and maintenance reserve payments for February 1996
and made such payments in late February 1996 and requested a similar extension
for payments otherwise due in May 1996. Finally, the Partnership settled the
Continental 747 lease in 1995 and accepted redelivery of the aircraft. It is
anticipated that certain scheduled maintenance and integration costs, which are
estimated to aggregate $1,300,000 will be necessary to complete a remarketing.
The Partnership intends to finance such costs as necessary through its cash
reserves and loan facility. Additionally, because of the need to meet Stage 3
aircraft thresholds required by FAA mandated noise regulation, Kiwi may require
that the Partnership hushkit (upgrade to Stage 3) one or both of the 727
aircraft leased to Kiwi. If the Partnership determines to perform such work,
which is estimated to cost $1.9 million per aircraft, it will need to finance
substantially all of such cost through its loan facility or other new borrowings
which may or may not be obtainable. If the Partnership elects not to do such
work, Kiwi may terminate the lease and the Partnership may encounter delays and
costs of redeployment. The Partnership has entered into an agreement in
principle with TWA to lease the
14
<PAGE> 16
747 aircraft for a term of 48 months at a rate of $180,000 per month. The
agreement is subject to final documentation and the completion of certain
maintenance and integration work discussed above. The Partnership's future
cashflow will be impacted by any changes in the status of the Kiwi leases as the
result of Kiwi's continued liquidity concerns or because of Stage 3
implementation. Additionally, the lease of the 727 aircraft to Continental is
scheduled to expire in October 1996, unless renewed. The Partnership is
investigating opportunities with respect to that aircraft.
Litigation
See Footnote Item 1, "Legal Proceedings" for a complete discussion of certain
class action lawsuits and related settlement.
RESULTS OF OPERATIONS
The Partnership's net income was $80,000 for the three months ended
March 31, 1996 (1996 Quarter) as compared to $204,000 for the quarter ended
March 31, 1995 (1995 Quarter). Net income per limited partnership unit also
decreased to $.02 for the 1996 Quarter from $.05 per Unit for the 1995 Quarter.
The decrease in the Partnership's net income for the 1996 Quarter
resulted primarily from a decrease in rental revenue, due to the off-lease
status of the 747-100 aircraft formerly leased to Continental for which one
month of rental income was recognized in the 1995 Quarter and maintenance
expense incurred in connection with 747 aircraft offset by a reduction in
depreciation expense due to the off-lease status of the 747 aircraft during the
1996 Quarter.
Rental revenue decreased $237,000, or 14%, for the 1996 Quarter,
principally due to the off-lease status of the 747 aircraft, in the 1996 Quarter
(one month of rental income was recognized and received in the 1995 Quarter)
partially offset by the lease of the spare engine to Kiwi in the 1996 Quarter.
No rental revenue was recognized in the 1995 Quarter with respect to the spare
engine.
Interest income for the 1996 Quarter increased by $10,000, or 15%, in
comparison to the 1995 Quarter. This increase was primarily attributable to the
interest income earned with respect to the undistributed Continental Lease
Settlement proceeds relating to the 747 aircraft, partially offset by the
continued repayment of advances and deferrals pursuant to various repayment
schedules.
Depreciation and amortization decreased $369,000, or 29%, for the 1996
Quarter in comparison to the 1995 Quarter. The decrease was attributable to the
off-lease status of the 747 aircraft in the 1996 Quarter. As a result, no
depreciation was charged in the 1996 Quarter.
Management and re-lease fees payable to the General Partners for the
1996 Quarter decreased $28,000, or 22%, in comparison to the 1995 Quarter. The
entire decrease was attributable to management fees which decreased because of
the decreases in the Partnership's rental revenue and net income (adjusted for
depreciation) which serve as the bases with respect to which the management fees
are calculated.
15
<PAGE> 17
General and administrative expense increased by $2,000 or 4% in the
1996 Quarter as compared to the 1995 Quarter which was consistent with the
Partnership's operations.
Interest expense decreased by $10,000 or 19% in the 1996 Quarter as
compared to the 1995 Quarter due to a decrease in interest rates and the
continued repayment of principal which reduced the outstanding balances.
Direct lease expenses increased by $15,000 or 58% due to an increase in
insurance premiums as well as aircraft storage costs relating to the 747
aircraft.
Aircraft maintenance expense of $287,000 was incurred in 1996 Quarter
which reflected the work completed with respect to a maintenance check performed
on the 747 aircraft. Such maintenance check and other integration expenses are
estimated to cost approximately $1,300,000 . No such amount was incurred in the
1995 Quarter.
16
<PAGE> 18
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber Group, Inc. (together, "PaineWebber"), among others, by
allegedly dissatisfied partnership investors. In March 1995, after the actions
were consolidated under the title In re: PaineWebber Limited Partnerships
Litigation, the plaintiffs amended their complaint to assert claims against a
variety of other defendants, including Air Transport Leasing, Inc., an affiliate
of PaineWebber and the Administrative General Partner in the Partnership
("Administrative General Partner").
The amended complaint in the New York Limited Partnership Actions
alleged, among other things, that, in connection with the sale of interests in
the Partnership, PaineWebber and the Administrative General Partner (1) failed
to provide adequate disclosure of the risks involved with each partnership; (2)
made false and misleading representations about the safety of the investments
and the partnership's anticipated performance; and (3) marketed the partnership
to investors for whom such investments were not suitable. The plaintiffs also
alleged that following the sale of the partnership investments PaineWebber and
the Administrative General Partner misrepresented financial information about
the partnership's value and performance. The amended complaint alleged that
PaineWebber and the Administrative General Partner violated the Racketeer
Influenced and Corrupt Organizations Act ("RICO") and the federal securities
laws. The plaintiffs sought unspecified damages, including reimbursement for all
sums invested by them in the partnerships, as well as disgorgement of all fees
and other income derived by PaineWebber from the limited partnerships. In
addition, the plaintiffs also sought treble damages under RICO.
On May 30, 1995, the US District Court certified class action treatment
of the plaintiffs' claims in the New York Limited Partnership Actions.
In January 1996, PaineWebber signed a memorandum of understanding with
the plaintiffs in the class action outlining the terms under which the parties
have agreed to settle the case. Pursuant to that memorandum of understanding,
PaineWebber irrevocably deposited $125 million into an escrow fund under the
supervision of the United States District Court for the Southern District of New
York to be used to resolve the litigation in accordance with a definitive
settlement agreement and plan of allocation which the parties expect to submit
to the court for its consideration and approval within the next several months.
Until a definitive settlement and plan of allocation is approved by the court,
there can be no assurance what, if any, payment or non-monetary benefits will be
made available to class members who are unitholders in the Partnership.
In April 1995, two investors in the Pegasus limited partnerships filed
a purported class action in the Circuit Court of the State of Illinois for Cook
County entitled Robert M. Jacobson, et al. v. PaineWebber, Inc., et al., making
allegations substantially similar to those in the New York Limited Partnership
Actions, but limited in subject matter to the sale of the Pegasus
17
<PAGE> 19
partnerships, and without a RICO claim. The plaintiffs in the Jacobson case
simultaneously remained as participants in the New York Limited Partnership
Actions, and subsequently sought to intervene in that action and to be named
class representatives for a separate subclass that they asked the Court to
establish consisting of investors in the Pegasus partnerships. The court in the
New York Limited Partnership Actions has not yet ruled on their request.
Three actions were filed in the District Court for Brazoria County,
Texas, relating to the sale and sponsorship of interests in the Partnership and
an affiliated partnership. The complaints make state law claims, specifically,
common law fraud, conspiracy, violations of section 27.01 of the Texas Business
and Commerce Code, fraud in the inducement, negligent misrepresentation,
negligence, breach of fiduciary duty, violations of the Texas Securities Act,
and violations of the Texas Deceptive Trade Practices Act. The plaintiffs seek
unspecified damages, including attorneys' fees, reimbursement for all sums
invested by them in the partnerships, exemplary damages, and treble damages
under the Texas Deceptive Trade Practices Act. All three actions have been
removed to federal court and two have been transferred to the United States
District Court for the Southern District of New York. The third action has been
dismissed with the consent of the parties on the grounds that it is duplicative
of the two actions now before the federal court in New York.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiff's purchases of various limited partnership interests. The complaint
alleges, among other things, that PaineWebber and its related entities committed
fraud and misrepresentation and breached fiduciary duties allegedly owed to the
plaintiffs by selling or promoting limited partnership investments that were
unsuitable for the plaintiffs and by overstating the benefits, understating the
risks and failing to state material facts concerning the investments. The
complaint seeks compensatory damages of $15 million plus punitive damages.
Under certain limited circumstances, pursuant to the Partnership
Agreement and other contractual obligations, PaineWebber and its affiliates,
including the Administrative General Partner could be entitled to
indemnification from the Partnership for expenses and liabilities in connection
with this litigation. The General Partners are unable to determine the effect,
if any, of such action on the Partnership's financial statements, taken as a
whole.
18
<PAGE> 20
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits and reports to be filed: none
(b) The Partnership did not file any reports on Form 8-K during
the first quarter of the fiscal year ending December 31, 1996.
19
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Pegasus Aircraft Partners, L.P.
(Registrant)
By: Air Transport Leasing, Inc.
A General Partner
Date: May 13, 1996 By: /s/ Joseph P. Ciavarella
------------------------
Joseph P. Ciavarella
Vice President, Treasurer
and Chief Financial
and Accounting Officer
20
<PAGE> 22
EXHIBIT INDEX
-------------
Exhibit 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from (a) Pegasus
Aircraft Partners LP. Form 10-Q and is qualified in its entirety by reference
to such (b) Form 10-Q for the quarter ended March 31, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 3,786,000
<SECURITIES> 0
<RECEIVABLES> 1,135,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,146,000
<PP&E> 74,446,000
<DEPRECIATION> (45,552,000)<F2>
<TOTAL-ASSETS> 35,040,000
<CURRENT-LIABILITIES> 4,273,000
<BONDS> 1,127,000
0
0
<COMMON> 0
<OTHER-SE> 29,640,000<F1>
<TOTAL-LIABILITY-AND-EQUITY> 35,040,000
<SALES> 0
<TOTAL-REVENUES> 1,526,000
<CGS> 0
<TOTAL-COSTS> 1,346,000
<OTHER-EXPENSES> 57,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,000
<INCOME-PRETAX> 80,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 80,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80,000
<EPS-PRIMARY> 0<F3>
<EPS-DILUTED> 0
<FN>
<F1>Partners Capital plus accumulated earnings or distributions.
<F2>Includes allowances for impairment and other reserves.
<F3>$.02 Income per limited partnership.
</FN>
</TABLE>
